I've been reading about and advocating the Trillion $ Coin option as a means of avoiding the US Debt Ceiling impasse on US Blogs for some time now, but have always sought to leave the lead role in writing diaries on the topic to legal or economic experts. And just when I finally decide to weigh in in a more substantial way Krugman decides to write more or less exactly what I wanted to write:Barbarous Relics - NYTimes.com

There will, of course, be howls from the usual suspects if that's how it goes [and the President decides to mint a Trillion $ coin]. Some of these will be howls of frustration because their hostage-taking plan was frustrated. But some will reflect sincere horror over a policy turn that their cosmology says must be utterly disastrous.

Ed Kilgore says, in a somewhat different way, much the same thing I and people like Joe Weisenthal have been saying: what we're looking at here is a collision of worldviews, one might even say of epistemology.

For many people on the right, value is something handed down from on high. It should be measured in terms of eternal standards, mainly gold; I have, for example, often seen people claiming that stocks are actually down, not up, over the past couple of generations because the Dow hasn't kept up with the gold price, never mind what it buys in terms of the goods and services people actually consume.

And given that the laws of value are basically divine, not human, any human meddling in the process is not just foolish but immoral. Printing money that isn't tied to gold is a kind of theft, not to mention blasphemy.

For people like me, on the other hand, the economy is a social system, created by and for people. Money is a social contrivance and convenience that makes this social system work better -- and should be adjusted, both in quantity and in characteristics, whenever there is compelling evidence that this would lead to better outcomes. It often makes sense to put constraints on our actions, e.g. by pegging to another currency or granting the central bank a high degree of independence, but these are things done for operational convenience or to improve policy credibility, not moral commitments -- and they are always up for reconsideration when circumstances change.

Now, the money morality types try to have it both ways; they want us to believe that monetary blasphemy will produce disastrous results in practical terms too. But events have proved them wrong.

And I do find myself thinking a lot about Keynes's description of the gold standard as a "barbarous relic"; it applies perfectly to this discussion. The money morality people are basically adopting a pre-Enlightenment attitude toward monetary and fiscal policy -- and why not? After all, they hate the Enlightenment on all fronts.

frontpaged by afew

Because that is what it comes down to, a fundamental dispute over the nature of money itself. And so I have been disappointed that our own resident economic and monetary experts - Jake, Chris Cook and Migeru et al haven't weighed in and contributed their undoubted wisdom on this topic. So this is my attempt to provoke some informed discussion on the subject both here in Europe and also on a more world wide basis because it seems to me that the ECB (driven by the Bundesbank) has been as prone as anyone to the logical fallacies endemic to the US debate.

First, please let me explain the issue as briefly as possible:

The US national debt has been increasing ever since it was first measured. Ronald Reagan tripled it; GW Bush almost doubled it during their terms of office. Vice President Cheny famously said to Paul O'Neill, then Treasury Secretary, "You know, Paul, Reagan proved that deficits don't matter. We won the mid-term elections, this is our due". The Congressionally approved debt ceiling was increased on a regular basis, a process which came to be regarded as routine.

Of course, when a Democrat like President Obama wins re-election, that is entirely a different matter, and the Republican controlled House of Congress has refused to increase the debt ceiling unless the President makes even bigger spending reductions to "entitlement programs". The last time this came up, Congress waited until the last moment to increase the debt ceiling, and the US's credit rating and economy was damaged as a result.

The main argument against increasing the debt ceiling further is that the total value of debt has become unsustainable, and that the current generation is unjustly forcing their children and grandchildren to pay for their current benefits. Certainly US debt as a proportion of GDP (103% in 2011) has increased substantially in recent years, and particularly in response to the financial crisis and depression which followed it. However it is still broadly comparable to other major economies, Germany (82%), United Kingdom (83%), European Union average (83%), Canada (85%,) and much lower than Japan (230%).

President Obama hasn't opposed reducing the level of debt, merely arguing that measures aimed at doing so should be "balanced" as between tax increases and expenditure reductions. Republicans have opposed all tax increases, and the recent agreement to delay the onset of the "Fiscal Cliff" by two months by allowing some temporary Bush era tax cuts to lapse was only passed because it was supported by the vast majority of Democrats (and a minority of Republicans) in the House. The crisis over the "Fiscal Cliff" is commonly misunderstood as being about reducing excessive debt, whereas it is actually about trying to avert a recession caused by trying to reduce debt levels too quickly.

And that is the nub of the matter. Republicans and "Austrian" economists argue that the only way to reduce debt is to reduce "bloated" state expenditures on entitlement programs, whilst Democrats and Keynesian economists argue that the current historically high level of debt is

A normal cyclical response to the fiscal crisis

Is not in itself a problem as it is being funded at historically low interest rates

Is not caused by entitlement programs which are solvent and funded by employee tax contributions

But is the consequence of historically low tax rates, and also the consequence of unfunded wars in Afghanistan and Iraq.

Enter the current Debt ceiling crisis which Krugman has compared to a kidnapper threatening Democrats to cut spending or else the economy gets it in the form of a crash caused by the US defaulting on its debts.

There is a debate as to whether Republicans would actually follow through on this threat, as it is their donor base - businesses large and small, defense contractors etc. - who would suffer most immediately from cutbacks in government procurement contracts and an economic crash. Yes, unemployment would rise rapidly and damage Democrats at the polls, but it is the business class who would most immediately see a rapid reduction in their profits if confidence in the US economy were to collapse. Obama is in power for the next 4 years in any case now, and business simply cannot afford to wait that long for economic recovery just to achieve their cherished entitlement spending reductions.

Many thus see the current crisis as another gigantic and damaging display of economic brinkmanship to see if Republicans can force Democrats into massive spending reductions in return for an increase in the debt ceiling. Figures as high a $3 Trillion in spending reductions have been mentioned, with the debt ceiling only increased on a temporary basis, and by less than the spending reductions to be imposed.

Never mind that such spending cuts would crash the economy, devastate tax revenues, and quite possibly increase the national debt as a proportion of GDP. This is class war, not rational economic debate, and a striking feature of Republican negotiating positions has been a refusal to actually cost the impact of any of their policy proposals. This is especially the case when it comes to identifying precisely which entitlements should be cut. Republicans have steadfastly refused to name and cost the precise cutbacks to be imposed, referring vaguely to closing loopholes and reducing waste, so that they will later be able to blame Democrats for the actual choices made.

On the Democrat side, many doubt President Obama's negotiating skills, and fear that his attempt to act "bipartisan" and remain the "adult in the room" will result in a historic dismantling of large parts of the Democratic "New Deal" and "Great Society" welfare programs. Many centrist Democrats accept the conservative framing of the crisis as being due to unsustainable expenditures, and dispute only the scale of the cutbacks to be imposed.

(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

In theory, therefore, the President could order the Secretary of the Treasury to mint a 1 Trillion $ coin and deposit it with the Fed thereby, by the arcane laws of Government book-keeping, reducing US Debt by 1 Trillion dollars, and taking the current debt ceiling out of play for the next year or so.

The objections to this gambit have been primarily legal, economic and political. Let us consider each in turn.

1. Legal argument

The legal argument has been that the provision in question was for the purpose of minting commemorative coins of much lower denominations, and was never intended as a mechanism to make a major reduction in US debt. Even proponents of the idea do not dispute this point. However, they say, the language of the provision is clear and unambiguous, and would thus not be overturned by a Court on the basis that the framers of the provision never intended it to be used in this way. In recent days the former Director of the Mint who co-wrote the provision in question together with an increasing number of legal scholars have come to that conclusion. However there is no telling what a Republican and conservative dominated SCOTUS would decide on the issue, although arguably, no one or no body would have standing to bring such a case.

However there is an even more fundamental argument in favour of the Coin. The US national Debt has been run up by a succession of administrations spending money on programs duly authorized by Congress. For instance the 2012 Federal Budget, duly approved by Congress, adds a $1.3 Trillion deficit to the National Debt, but Congress did not lift the debt ceiling to actually enable the Government to fund that debt. Does the 2012 budget supercede the older Debt ceiling limit even if it did not specifically amend it?

For President Obama to stop spending on some of these programs in order to remain below the debt ceiling could actually be construed as him breaking the law. Which programs should he cut? If he cut (say) pensions, could pensioners not sue him for discriminating against them and not paying them moneys he was instructed by congress to pay out? On what legal basis could he cut some programs and not others? The Republican dominated House of Congress is currently suing the President for not fully implementing the Defense of Marriage Act (DOMA). Expect the Democrat dominated Senate to sue him if he fails to pay budgeted payments to pensioners in full.

In other words, the Debt ceiling law conflicts with all other legislation passed by Congress which contribute to the US exceeding the debt ceiling when implemented in accordance with such duly passed legislation. When considered in the context of the 14th. Amendment which prohibits the US from defaulting on its debts, the debt ceiling legislation could actually be found to be unconstitutional. The point is that the debt ceiling law does not amend previously approved spending legislation, although a Court could conceivably find that it supercedes and thus over-rides previously approved legislation. But how is the President to decide what legislation not to implement - the defense budget, Medicaid? The potential for further political dispute and litigation is endless.

The bottom line, as far as this line of legal reasoning goes, is that the President may have no choice but to mint a large denomination coin in order to comply with both the Debt ceiling and previously passed expenditure programs. Too be clear, the President cannot simply mint coins for his own use, or to fund some of his own favoured programs not approved by Congress. the only purpose, in minting the coin, would be to enable the President to comply with both the Debt Ceiling and other spending programs duly approved and mandated by Congress whilst not breaching the 14th. Amendment which outlaws defaulting on historic debts.

2. Economic argument

The economic argument has been amply made by Krugman in a succession of increasingly strident and confident posts. To summarise: Swinging cuts in expenditure is the very last thing the US needs as it tries to emerge from recession. Increasing the amount of money in circulation (as could be an indirect consequence of depositing the coin in the Fed) will not be inflationary so long as the US economy remains mired in a liquidity trap, with negative real and nominal interest rates, and with the economy operating way below capacity.

If I understand the economic landscape correctly, Krugman is actually a pretty mainstream Keynesian economist on this. Modern Monetary theorists go much further: Governments should print/mint money to fund their expenditures, and use increased taxation to mop up excess liquidity at times of rapid economic growth to prevent excessive inflation. Furthermore, some inflation is actually desirable at times of huge economic inequality as a means of reducing the value of historically accumulated wealth, and thus the relative scale of wealth inequality in society - which in itself seen as an economically inefficient, not to mention a socially iniquitous feature of recent economic trends. (Correct me if I am getting this wrong guys!).

3. Political argument

When I first started to articulate the case for the Trillion $ Coin, I was poo-pooed by liberal political commentators like Booman who regarded the whole thing as blatantly illegal and politically silly. Just because the the Republicans are crazy to threaten default if they don't get their way on "entitlement" reductions, doesn't mean they President can suddenly go all crazy and act in a blatantly unconstitutional and politically silly fashion.

I have little doubt that Booman was fully in line with mainstream establishment Democratic thinking. The whole system depends on Obama acting as the "adult in the room" even if all around him go crazy. The markets would be spooked, and therefore the establishment in both parties would be spooked. However I also have little doubt that many political liberals in the US also basically agree with the mainstream "Austrian" or "Chicago" school of economics, which is now virtually the only sort of economics taught in Economics 101 and propagated in the MSM in the US. To them, for the President to instruct the Treasury to mint a Trillion $ Coin is not only legally dubious and economically all wrong, but also politically very dangerous. It strikes at the very heart of their belief if the intrinsic and real value of money and the "obvious" inflationary implications of simply minting more.

There is no doubt that some Republicans are salivating at the prospect of the President minting a Trillion $ Coin as this would put him at odds with much of the Democratic as well as Republican and independent political and economic establishment of the country. The President has been consolidating his position since his re-election, and for him to act in such a fashion would be construed, by the MSM, as the desperate act of an unscrupulous man. Never mind that the alternative would be an (unconstitutional) default and economic melt-down.

For all of the above reasons, I expect the President to mint such a coin only as a last resort after every alternative has been exhausted. First he will inflict swingeing defense and discretionary expenditure cuts so that even the Republican donor base will scream at the cancellation of Government contracts. Overseas military bases will be closed, the Afghan withdrawal accelerated, and perhaps even a few private sector prisons closed. If all of this doesn't bring Republicans to heel, he can always keep the "Coin" jangling in his pocket. Interestingly, White House Press Secretary Jay Carney has referred all queries on the coin to the Treasury...

If the President does end up minting the coin, you can expect Republicans to go absolutely ape-shit, as to do so strikes at the very heart of their economic ideology. With one bound the President will be free of their debt ceiling shenanigans and almost all of their leverage, as controllers of the House, will be lost. In a fit of peak, they would probably seek to impeach the President, never mind the fact that impeachment is a process which should only be used in cases of gross personal misconduct rather than as a tool in a policy dispute.

If the President is impeached, I expect the Senate to treat the charge with the derision it deserves. Even conservative Democrats uncomfortable with the Coin strategy will come back on side, and the President's hand will be strengthened immeasurably on acquittal. Republicans will have to learn that control of the House is not sufficient to hold the President, and the US economy and people to ransom. The conservative stranglehold on power will have been broken and the Reaganite fever lifted. If only we, in Europe, had a similar opportunity to break the back of "Austrian" economic theory and practice.

PS - Some democrats have suggested that the trillion $ coin should have President Reagan's likeness on one side, and GW Bush's on the other - in honor of the fact that Reagan tripled the National debt, and Dubya doubled it - in order to emphasize the origins of the debt and counteract The current GOP orthodoxy that Obama is responsible for it all. My preference is to have Iraq on one side and Afghanistan on the other, to highlight the fact that the estimated 3 to 4 Trillion cost of those wars (c. 25% of total US National Debt) were never funded and that wars have real costs in treasury as well as lives. Obama could go further and propose an Oil Company, Carbon, Tobin or gambling tax as a means of funding the Coin and eventually buying it back off the Fed and melting it down. Let those who benefit from wars pay for them.

Some democrats have suggested that the trillion $ coin should have President Regan's likeness on one side, and GW Bush's on the other - in honor of the fact that Reagan tripled the National debt, and Dubya doubled it. The current GOP orthodoxy is that Obama is responsible for all of the debt.

However my preference would be to have Iraq on one side and Afghanistan on the other, to highlight the fact that those wars were never funded, and that wars have real costs in treasury as well as lives. Obama could go further and propose an Oil Company, Carbon, Tobin or gambling tax as a means of funding the Coin and eventually buying it back off the Fed and melting it down. Let those who benefited from the wars pay for them.

I have suggested that the obverse have a scene of the original Boston Tea Party showing 'Indians' heaving a crate of British East India tea overboard from an East Indiaman. The top of the crate would be visible and would be filled in one direction by a replica of the The Trillion Dollar Coin showing the obverse and thus this scene in miniature. As it was in the beginning....

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

Since nobody else has quoted the law that the proponents refer to on ET, here it is: (Sorry, no link to the actual law, I found it in an article on the coin in German)

The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary's discretion, may prescribe from time to time.

That doesn't sound as if there were legal problems. I heard anyone seriously citing economic ones either (just Weimar! Zimbabwe!), but plenty of political problems. The worst of the political problems will be the fact that Obama doesn't want a chance to politics without compromising with the Repugs.

Obama's problem will be the fiscal and or monetary conservatives on his own side of the aisle. It is difficult to overstate the degree to which Austrian/Chicago economics is the only economics in US discourse. However if Republican's succeed in backing Obama into a corner, he may have no option, and in that scenario even some of the most conservative Dems will probably have his back. It all depends on how the choreography of the battle is handles, and that is something Obama and his team have been reasonably adept at. But expect the crisis to drag on for months...

Here's Fox News confusing the idea of a coin-shaped pile of platinum worth $1 trillion and a $1 trillion coin that happens to be made out of platinum and can be of any size. We saw earlier this week that the National Republican Campaign Committee also doesn't understand how coins work, so perhaps I can try again to explain.

Any idiot can face a crisis - it's day to day living that wears you out.

To amplify Iglesia's comment, The front, traditionally, should have someone's portrait, THE UNITED STATES OF AMERICA written around the top, above the head, the denomination written around the bottom, ONE TRILLION DOLLARS, the date written in the lower right, as oriented from the face, a mark denoting the mint at which it was struck, the word LIBERTY on one side of the head and the phrase IN GOD WE TRUST on the other side. Dimes put THE UNITED STATES OF AMERICA on the back due to space limitations, but that should not be a problem with a trillion dollar coin. A milled edge is optional, not being used with pennies, nickles or the Susan B. Anthony dollar, which was a many sided polygon. The value of the metal content need have no more relation to the value of the coin than did the base metal content of the Susan B. Anthony dollar have to its face value, but it must be platinum per the requirements of the authorizing statute.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

At the very least it should inspire a few Russell Crowe Trillion $ Heist movies where the protagonist discovers, to his horror, that no one will actually believe he has got the real thing rendering it effectively worthless...

Also perhaps a stupid and stupider 7 movie sequel where the protagonists counterfeit the coin and are caught when they attempt to "cash" it in because the one and only true coin is in the Fed and no "real" copies exist.

No, but he is desperately trying to be - getting inside White House briefings - and trying to coral some of the wild cats of the progressive blogosphere on their behalf. However I think his attitude highlights a real problem with the progressive blogosphere in the USA. Most US liberals and progressives are, more or less, economically illiterate and haven't gotten past Austrian or Chicago school economics 101. They share the same basic assumptions and theoretic constructs of austerity economics, even if they would like to temper it's extremes by saving as much of the New Deal and Great Society as they can.

However I also think Boo is probably correct in his assessment of how the Trillion $ coin would play in the US. Obama has desperately been trying to play "the adult in the room" and keep Wall Street onside. So far he has the Republican right more or less where he wants them - unhinged from establishment Republicans who voted for the Fiscal Cliff compromise.

Obama risks uniting the Republican and conservadem establishment against him if he goes the coin route.

<>However I also think Boo is probably correct in his assessment of how the Trillion $ coin would play in the US. Obama has desperately been trying to play "the adult in the room" and keep Wall Street onside.

yeah...

There seem to be two kinds of objections. One is that it would be undignified. Here's how to think about that: we have a situation in which a terrorist may be about to walk into a crowded room and threaten to blow up a bomb he's holding. It turns out, however, that the Secret Service has figured out a way to disarm this maniac -- a way that for some reason will require that the Secretary of the Treasury briefly wear a clown suit. (My fictional plotting skills have let me down, but there has to be some way to work this in). And the response of the nervous Nellies is, "My god, we can't dress the secretary up as a clown!" Even when it will make him a hero who saves the day?

Most US liberals and progressives are, more or less, economically illiterate and haven't gotten past Austrian or Chicago school economics 101. They share the same basic assumptions and theoretic constructs of austerity economics, even if they would like to temper it's extremes by saving as much of the New Deal and Great Society as they can.

Stephanie Kelton calls them deficit doves, as opposed to deficit hawks. Both believe deficits should be reduced, it's just that the liberal deficit doves are willing to entertain short-term stimulus policies.

When I met Kelton and Wray at a conference here some time ago, I had no idea how important they, and their ideas were about to become. I even asked her the conventional economic question about "printing money" ultimately leading to inflation and was surprised by the vehemence of her response to the contrary. Part of me wants Obama to mint the coin just to see Republican and Conservadem heads explode. Part of me wants him to face the political fall-out of a (probable) failed impeachment attempt just to overturn the whole conservative economic narrative of the right. After all he did promise to be a transformational President...

But this whole issue exists at a wonderous juncture of farce and satire on the one hand and current US law and politics on the other and is thus inherently an issue of drama and theater where appearance is of the essence.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

A plurality of Americans are skeptical of a proposal to bypass the federal debt ceiling by minting a $1 trillion dollar platinum coin, according to a new poll.

According to the survey by YouGov and The Huffington Post, 38 percent of voters disapprove of such a proposal. Only 19 percent say they believe the president should authorize the minting of such a coin, while 43 percent say they are not sure about the plan.

A loophole in federal law -- originally designed to allow for the manufacture of collectable coins -- appears to give the Treasury Secretary unchecked ability to mint platinum coins of any denomination. Under the scheme, the Treasury could mint a $1 trillion coin, deposit it at the Federal Reserve and continue paying bills despite exceeding the debt ceiling, all without congressional approval.

The idea has been picking up steam, with the country expected to hit the borrowing limit in about a month. But most Americans are still unaware of the idea, according to the poll.

More than half, 55 percent, said they've heard nothing at all about it. Only 7 percent say they have heard a lot about the idea, while just over a quarter say they have heard a little about the platinum coin scenario.

The White House has thus far refused to comment on the proposal, saying simply they believe it is Congress's responsibility to raise the debt ceiling.

"The president expects that Congress will fulfill its essential responsibility to pay the bills that Congress has incurred," White House press secretary Jay Carney said Tuesday. "And remember, this is a responsibility that Congress assigned to itself in order to try to get Congress to spend less and be more focused on deficit reduction. ... Congress has the power that it assigned itself to raise the debt ceiling, and it should do so, because the alternative is obviously unacceptable."

But the YouGov poll finds that voters do not necessarily agree with the White House. Of those surveyed, 41 percent say Congress should not raise the debt ceiling, while 32 percent believe their representatives should. Yet those surveyed are also wary of default. Instead, voters favor cutting federal spending by 40 percent 6-to-1 over defaulting on debt payments.

Voters are also wary of the consequences of a default, with 57 percent saying doing so would have a major negative effect on the economy, and 15 percent saying it would have some negative effect. Eight percent believed doing so would have some sort of positive influence on the economy.

My position is not that the Trillion $ coin is a popular solution, but that it will have positive results - which ultimately will result in the President's action being vindicated in retrospect. It's about the extent to which Obama has the courage and conviction to actually lead.

This is one of those fairly useless polls which asks people about something they know almost nothing about, and so their response is somewhat floundering as they struggle to fit the question into a preconceived conceptual frame.

This is one of those occasions where the President may have to just lead - and allow himself to be judged by the success of his action.

Of those surveyed, 41 percent say Congress should not raise the debt ceiling

Hasn't Congress already approved the current tax rates and all spending? And if they know arithmetic, they will know what the shortfall is?
So why is there a separate vote on saying "oh, and we realise we're short by this much, but we're good for it"?

Interesting comment which I have not seen elsewhere. Is there any evidence to support this interpretation?

It seems to me, then, to be bad faith if Congress approves a budget with an inbuilt $1.3 deficit (2012) and then denies the President the means of funding it, and also denies him the discretion not to implement it fully. (The House is currently suing the President for not implement DOMA fully, and SCOTUS has also ruled that line item vetos of bills are unconstitutional i.e. partial implementation).

In general, funds for federal government programs must be authorized by an "authorizing committee" through enactment of legislation. Then, through subsequent acts by Congress, budget authority is then appropriated by the Appropriations Committee of the House. In principle, committees with jurisdiction to authorize programs make policy decisions, while the Appropriations Committees decide on funding levels, limited to a program's authorized funding level, though the amount may be any amount less than the limit.

In practice, the separation between policy making and funding, and the division between appropriations and authorization activities are imperfect. Authorizations for many programs have long lapsed, yet still receive appropriated amounts. Other programs that are authorized receive no funds at all.[citation needed] In addition, policy language--that is legislative text changing permanent law--is included in appropriation measures.

The fact that the US "Budget" is not one coherent document and plan but a series of authorizations and appropriations certainly does not help the process. But as I understand it, if appropriations exceed revenues by $1.3 Trillion (and are known to do so) then the whole process is nonsensical - or in bad faith - if a funding mechanism (debt ceiling increase) is not also put in place - as was always the case until Obama got into power.

Otherwise the Republican congress can claim it authorized and appropriated for (say) medicaid, but Obama wouldn't implement it - and then sure him for not doing so. What if Obama (say) rather than cutting Medicaid cut military spending dramatically, withdrew from Afghanistan immediately, closed Guantanamo and all private prisons and let the prisoners go fee because there was nowhere to house them - do you think the House wouldn't impeach him? And yet he can claim they refused to fund those programs.

This could be fun. How quickly would the House cave on the debt ceiling then - or at least provide a specifically targeted funded mechanism for those expenditures?

The Supreme Court further complicated matters in Train vs. New York, reversing 170 years of previous practice. It kept in check Richard Nixon, but still it did violence to the original system as laid down in the constitution.

But presumably the President can't spend money he hasn't got - so does NOT spending (say) all the military budget duly appropriated constitute a default? Clearly if he didn't pay defense contractors, it could be construed as a default. But if he closed German military bases, Guantanamo, withdrew early from Afghanistan, didn't renew contracts for private prison operators and defense contractors etc. that is hardly a default as such - but would make Republican heads explode.

[...] the President may propose to Congress that funds be rescinded. If both the Senate and the House of Representatives have not approved a rescission proposal (by passing legislation) within 45 days of continuous session, any funds being withheld must be made available for obligation. Congress is not required to vote on such a proposal and has ignored most Presidential requests. [...] The Act was passed in response to Congressional feelings that President Nixon was abusing his ability to impound the funding of programs he opposed, and effectively removed the historical Presidential power of impoundment.

I think you are correct: the president can make changes, but cannot deliberately "starve" programs he doesn't like.

I'd like to see Republicans sue the President for (say) withdrawing early from Afghanistan or closing Guantanamo because he can't fund it and at the same time refuse him authority to borrow money to fund it...

Obama should borrow a page from Republican strategists and just act, leaving his opponents to analyze and react. But the action should be decisive. Don't just mint one coin, mint a run of them, perhaps a thousand. Then deposit enough of them at The Fed to fund all programs to which Republicans object for the next ten years, and then some. Then, during the State of the Union he could have some in his pocket and tell the nation that, if the Republicans want, he is prepared to pay off the national debt. He could jingle the coins in his pocket while noting that there is plenty of money available and more where that came from.

This would constitute a reassertion of sovereign independence on the part of the Government of the United States. He should also insist on using some of the deposited wealth to finance all federal election campaigns. Then freedom from Wall Street would be complete. He would only have to worry about the quality of his personal security detail.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

So far the argument is that the Government cannot default on previous expenditure duly authorised by Congress. I think a lot of people - even on the left- would have a problem with Obama minting money to pay for expenses that haven't even been incurred yet.

But what would all the rich people who get interest for funding Govt. debt do if Obama simply paid them all off?

Where would they get their income from then?

What would they do with all the money they have accumulated? Heaven forbid that they should actually have to engage in entrepreneurial activity and invest in in productive assets.

Krugman and other economists talk a lot about the importance of managing inflation expectations. Expectations of inflation would skyrocket and general panic would ensue.

Hence my very specific proposal to fund a very specific and known past expenditure - on the Afghan and Iraqi wars. No one can deny it was a real and authorised (if unfunded) expenditure which has to be paid for.

Hence also my proposal that Obama propose a specific tax (Tobin, Carbon, Corporate) to pay for an ultimately buy back and smelt the coin.

Social Security, Medicare, Federal Retirement payments, etc. are debts which HAVE been incurred, not all of which are currently due. By minting a number of coins, which do not yet need to be deposited, all question of the ability to meet these obligations are answered.

But what would all the rich people who get interest for funding Govt. debt do if Obama simply paid them all off?

Perhaps they and their bought and paid for representatives in Congress should turn their 'minds' to that issue. It would be a 'Put up or shut up!' statement.

the importance of managing inflation expectations

But I believe that paying off the national debt would constitute a profound contraction of the money supply and thus deflationary. Federal stimulus would be what would be needed. Else Congress could behave sufficiently responsibly that they could be entrusted with a national debt in a time of historically low interest rates. Plus, it is about time some of these 'expectation' theories be put to the test.

Hence my very specific proposal to fund a very specific and known past expenditure

That would constitute paying off over two thirds of the national debt at present, but is quite acceptable to me as a start.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

But I believe that paying off the national debt would constitute a profound contraction of the money supply and thus deflationary. Federal stimulus would be what would be needed. Else Congress could behave sufficiently responsibly that they could be entrusted with a national debt in a time of historically low interest rates. Plus, it is about time some of these 'expectation' theories be put to the test.

I think one needs to break this down.

Today, the government creates money by paying, then borrows from banks that then borrow from central bank, resulting in a chain of debts going back to the central bank.

If coin(s) are minted and deposited with the central bank and then expenses are drawn from that, the thing that is removed is the chain of debts (and their associated interests). And that is only for the borrowing that otherwise would have been needed (current government bonds are not removed). Even if so many are deposited that their sum is larger then the current national debt all that means is that for the forseeable future there will be no new government bonds. This removes a subsidy to the banks in the same way as if the government borrowed directly from its central bank but has the added feature of removing the scary national debt.

This is deflationary in that expected government payout to banks over the next years will be lower, but only slightly so as the interest is very low and the banks are not very good at spending their money into the rest of the economy.

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I agree, but supper was calling. :-) There could scarcely be a better time to eliminate the unnecessary hocus pocus step involving the public bond auction, along with the resulting savings from eliminating the bond interest, than when the Federal Reserve interest rate is at or near the zero bound. The current situation presents an auspicious conjunction of circumstances favoring such a move, if only we had a president who did not worship the ground upon which the wealthiest bankers walk.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

This is deflationary in that expected government payout to banks over the next years will be lower, but only slightly so as the interest is very low and the banks are not very good at spending their money into the rest of the economy.

Technically correct, but will be more than offset by having the reference interest rate at longer maturities drop to zero, which will mean that investments which were unprofitable on yesterday's interest rate will become profitable tomorrow.

And expanding the domestic capital plant is (shock, horror) inflationary (though only very slightly in the present state of demand).

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

It would certainly be a boon to a project to construct windmills along the front range of the Rockies and a transmission infrastructure to tie them into both the Eastern and Western US grids. Texas also if they agree.

Undertaking any 'self liquidating' project that promoted the general welfare would be like printing money. Oh, wait....

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

So when up against the zero bound, the central bank needs to borrow directly to the state in order to further lower real interest rates?

If you insist on using open market operations in government bonds to conduct your interest rate policy, yes. Then the CB will have to buy tsys until the interest rate on tsys drops to where the CB wants it to be. This is what QE does for you.

But the CB doesn't have to do this by buying and selling tsys (though if the CB actively refuses to treat tsys at least as well as private bonds, or to lend directly to the state on the same terms it offers private banks for rediscounting tsys, you will most likely have a constitutional crisis on your hands).

The CB can simply offer private banks the option to borrow at longer maturities against suitable collateral. This is what LTRO would do for you if it had not been a one-off event. And the CB can offer banks longer maturity deposit facilities. This is already routine in the Eurosystem.

What happens today is that the bank grants you a mortgage, and then it posts the mortgage as collateral with the CB for an overnight loan (neglecting the interbank market, which can be done without loss of generality under an interest rate targeting CB). Instead of this, the CB can offer to let the bank post the mortgage as collateral for a loan with the same maturity as the mortgage. Basically, the CB can offer the bank a fixed-rate loan, as opposed to the variable-rate loan it gets today.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

I didn't check the sums in question and probably included a top of the head estimate of the total of the current national debt added as a result of actions under Bush 43, which included debt resulting from authorized spending not covered by the tax cuts for the wealthy and the expenses incurred late in that administration and continuing into Obama's administration necessitated by the response to the GFC/GCF - the economic dump that was the outcome of the fecklessness that came to a head in the late summer of 2008.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

I'm a bit of a self proclaimed expert on elephant dung having spent a little time tracking elephants in Tanzania/South Africa so I would suggest NOT cleaning it up! The problem with the Bush abuses is that they are now consolidated into one seamless National debt which the Republican are now trying to dump en masse on Obama. The beauty of the Trillion $ coin is that it re-fertilizes the dung heap and gives the Fed the task of recycling it among the "investor class".

To me a deeper beauty is that, by merely getting the topic into general circulation sufficiently that those devoted to the 'money as a physical thing' have to engage in order to defend their beliefs, their minds are subtly poisoned by the very thought they are trying to suppress. If they have to attempt to make such a thing illegal they have already acknowledged its potential reality.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

Do these guys not have credit cards? Have they never seen a $10 bill consisting of a piece of paper saying/claiming it is worth $10? And what is $10 anyway in itself? Cue angst ridden existentialist inquiry on Fox: Obama has stolen "our" money!

I am reminded of the Pharisees trying to compromise Jesus by asking him whether Jews should pay taxes to Caesar. Taking a (Roman) Coin from his pocket Jesus asked "Who's head is on it? - you are only paying them with their own money"

Technically correct, but that is not how Republicans and the MSM would portray it. In practice the National Debt is the bogeyman they use to scare everyone off the idea off Government expenditure in the first place. It allows them to blame Democrats for spending even if they originally authorized it. Remove the bogeyman and you scare the hell out of them that there is now no effective brake on BIG GOVERNMENT. The balance of powers between the Executive and Congress will have been shattered, and a constitutional crisis created. That is probably the (bogus) basis of any impeachment proceedings they would initiate.

Krugman and other economists talk a lot about the importance of managing inflation expectations. Expectations of inflation would skyrocket and general panic would ensue.

That's because Krugman subscribes to a built-to-fail modeling architecture, which means that he has to sweep its repeated empirical failures under the rug. Expectations and preferences form a very convenient rug to sweep empirical failure under, because they are inherently unobservable.

Whenever an economist says either of those words, you can bet your bottom dollar that he's trying to surgically remove some inconvenient empirical falsifiability from his theories.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

Matt Yglesias argues that President Obama appears to be legally required to pursue the trillion dollar coin option in the event that Republicans refuse to raise the debt limit:

Under the Congressional Budget and Impoundment Act of 1974 it's illegal for the president to spend less money than congress has appropriated--the Nixon administration had this idea that it could enact unilateral spending cuts, but it can't.

Under the terms of the statutory debt ceiling, the president can't borrow extra money without congressional authorization.

I don't believe there's a specific statutory prohibition on collecting taxes that congress hasn't authorized, but this principle is pretty literally the foundation of the entire fabric of common law.

The Treasury Secretary can instruct the mint to create platinum coins of any denomination.

Given those facts, Yglesias concludes, the coin must be minted if Republicans refuse to raise the debt limit.

Another argument that the Administration can make is that they are legally required, per the 14th Ammendment, to service the debt of the United States and that, given one previous petulant attempt by an ideologically driven Republican faction to unnecessarily force the US Government to default, which, in fact, did damage the credit rating of the nation, and given the potential for another, it does not appear that the Congress, as currently constituted, is sufficiently mature to be allowed the indulgence of a national debt, so, absent legally binding and sufficient remedies, he will be forced to pay off the national debt and operate on a mixture of tax revenues and seigniorage from the mint, the consequences of which are hard to predict, but one of which might be an increased need to tax the wealthy so as to insure the value of the currency.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

And, no, Booman is not in line with establishment Democratic thinking. Democratic leaders have endorsed avoiding default by any means necessary.

The markets will not be spooked. Why do people continue to insist the markets will be spooked by Austrian idiocy when the evidence says otherwise? People said the markets would be spooked if the European periphery didn't engage in outrageous budget-cutting. Except that's what spooked the markets.

What will spook the markets is allowing lunatics to throw us into default.

As ever, the markets will not feel, indeed they are merely abstractions for a large number of trades, but they will be reported as being spooked when they are supposed to be spooked. And that is what matters in the theather that is politics.

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The Trillion dollar coin is fun because it makes the debt ceiling theather understandable to a large audience and robs it of its seriousness. That is why I am surprised it has come this far. If the administration would choose to play hard ball I would have guessed that the 14th amendment option of simply instructing the treasury to pay out the money and delaying issuing new government bonds would have been more appaeling to the apparent need of looking serious. Perhaps it is the reluctance to play hard ball at all and thus choosing a strategy for it that have pushed the administration into a position where potential hard ball strategy has been settled for them.

I don't think anything will happen though. Consistent with previous negotiations I think the administration will declare hard ball off the table before negotiations are finished with the House. And the compromise will include cutting important programs. I hope I am wrong.

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If nothing else, the Trillion $ Coin option has the potential to serious f*ck with their minds and political expectations. If fear of inflation is a weapon they use to prevent "excessive" government expenditure, why not use fear of the "coin" to undermine their confidence in their own negotiating position on the debt ceiling?

[President Obama] should absolutely refuse to even entertain the possibility of negotiations over raising the debt ceiling. Normalizing the idea of holding the economy hostage to extract unrelated policy concessions is a terrible development, and habit needs to be broken. [...] if the president can't acknowledge the validity of the coin option, what is the point of working through the logistics and generally talking about it so much? The real danger of the coin option is the ignorance of the national media. As we've been finding out, many members of the press have primitive, pre-Enlightenment beliefs about money. They think the government is like a household, and don't consider the implications of fiat currency. Running the government on platinum seigniorage, even temporarily, would sound deeply strange, and you can bet Republicans would be howling bloody murder. The coverage would be key. If only we had panicked reports from the likes of Judson Berger blaming the president entirely for the situation, gabbling incoherently about hyperinflation and default, then we'd likely see a big backlash and possibly impeachment.

Therefore, hashing out the debate now is critical, to give the president the confidence he needs that the platinum option is a viable one and he won't be crucified for exercising it, so he can absolutely refuse to negotiate over the debt ceiling. I'd say Team Coin has done quite well in this task so far.

Anyone who writes about money (or for that matter debt or finance) knows what I'm about to say. Money scares the bejesus out of people.

Paul Krugman wrote about this in a recent post, entitled Monetary Rage, where he described the emotionally-charged reactions he gets from readers when he ventures into the dark underworld of money. As a young graduate student at MIT, Krugman was reportedly urged to avoid the money question at all costs (see here at 2:13), lest he be branded one of the unserious types. My colleague Randy Wray tells a story about the reaction he got from Robert Heilbroner when he asked Heilbroner to review his book Understanding Modern Money.

Let me go back to 1997 when I was finishing up my book titled Understanding Modern Money and I sent the manuscript to Robert Heilbroner to see if he'd write a blurb for the jacket. He called me immediately to tell me he could not do it.

As nicely as he could, he said (in the most soothing voice), "Your book is about money--the most terrifying topic there is. And this book is going to scare the hell out of everybody."

I had a similar experience in a graduate macroeconomics class at Cambridge University. Willem Buiter was busy lecturing on IS-LM theory, when I raised my hand and asked something about endogenous money (a question I'll admit was designed to challenge the underlying assumptions (loanable funds) in his model). I'll never forget his response. He said:

If you are the type of person who thinks money is important, you're probably the same type of person who would enjoy sitting in your basement and beating yourself with a rubber hose.

I obviously touched a nerve. The same kind of nerve Krugman occasionally touches and Heilbroner knew Randy would touch. Just what is it about money that tends to evoke such a visceral reaction in people?

If one were to hold one's nose and agree to play with the New Classical or New Keynesian complete markets toolkit, it would soon become clear that any potentially policy-relevant model would be highly non-linear, and that the interaction of these non-linearities and uncertainty makes for deep conceptual and technical problems. Macroeconomists are brave, but not that brave. So they took these non-linear stochastic dynamic general equilibrium models into the basement and beat them with a rubber hose until they behaved. This was achieved by completely stripping the model of its non-linearities and by achieving the transsubstantiation of complex convolutions of random variables and non-linear mappings into well-behaved additive stochastic disturbances.

Those of you with time on your hands and a interest in spending some it it in a basement being beaten with a rubber hose, may want to take a look at my recent Centre for Economic Policy Research Policy Insight No. 24, "Can Central Banks Go Broke?"

So, Buiter was telling Kelton "welcome to the rubber hose club" in that classroom at the LSE.

I've also seen the reference circulate as "people who worry about central banking are the kind that like to beat themselves in the back with a rubber hose". Again attributed to Buiter, who regularly writes about central banking.

I suspect Buiter is referring to beating with a rubber hose as a torture method used to extract confessions by security forces...

But the reference was to her being one of those who beat themselves with a rubber hose - a masochist. It could have reflected just how deeply he DID NOT want to seriously consider the topic - a sort of nuclear option for cutting off a line of discussion/inquiry. It would be interesting to ask her what she thought at the time.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

Those of you with time on your hands and a interest in spending some it it in a basement being beaten with a rubber hose, may want to take a look at my recent Centre for Economic Policy Research Policy Insight No. 24, "Can Central Banks Go Broke?"

I avoided economics in my "Economic and Social Studies" degree because I had difficulty making the sort of assumptions about rationality and utility which seemed to be the foundation stones of their theories and models. The fact that they were generally wheeled out like Priests to bless certain Government policies or private enterprise practices may also have had something to do with it.

It never dawned on me that they might also have had a BDSM section in the basement. But then I was young and foolish and believed in human rights and the uniqueness of every person. It took a long time to beat that out of me...

I think it is the power. Once you realise that money is created out of thin air to claim power over people and things, backed up by the armed goons of the state, then economics becomes a question of power distribution. People get high salaries because they wield power, this can come in the form of having a rare enough ability, but mostly it is just the old monkey hierarchies that show. Those that by government fiat get to create money gains power over those who do not. Etc.

Makes the invisble hand and self-structuring markets rather silly. So it must be shunned.

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The Treasury Department will not mint a trillion-dollar platinum coin to get around the debt ceiling. If they did, the Federal Reserve would not accept it.

That's the bottom line of the statement that Anthony Coley, a spokesman for the Treasury Department, gave me today. "Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit," he said.

This leaves out the worrying option: is he doing that because he wants to cave in?
Obama is not a liberal. He may actually want to promote a right-wing agenda, while keeping some pretense as he's just been re-elected.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

The administration's position is that raising the debt limit is Congress's responsibility until the day that Congress votes to make it the White House's responsibility, which is a resolution the Obama administration would happily accept. Until then, White House officials say, they will not negotiate over the debt ceiling, and if congressional Republicans attempt to use it as leverage, then the consequences will be theirs to bear. As White HOuse Press Secretary Jay Carney put it, "there are only two options to deal with the debt limit: Congress can pay its bills or they can fail to act and put the nation into default,."

The positive is that they also rule out negotiation.

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Yes -hopefully. But they have similarly ruled things out in the recent past, only to change later.
So we'll see. I'm just suggesting that it is a possibility that Obama is not as bad a negotiator as we may think, and that he ends up with what he actually wanted. Not being in his head, I can't know for sure.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

Or because he has polls that say that the public will blame the Republicans in Congress more than it will blame the White House for such brinkmanship and for the mandatory cuts that come into effect as the result of such brinkmanship.

Those cuts may well be considered acceptable collateral damage for excluding the Republic Party from politics for a generation.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

The Treasury Department will not mint a trillion-dollar platinum coin to get around the debt ceiling. If they did, the Federal Reserve would not accept it.

That's the bottom line of the statement that Anthony Coley, a spokesman for the Treasury Department, gave me today. "Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit," he said.

The inclusion of the Federal Reserve is significant. For the platinum coin idea to work, the Federal Reserve would have to treat it as a legal way for the Treasury Department to create currency. If they don't believe it's legal and would not credit the Treasury Department's deposit, the platinum coin would be worthless.

The idea of minting a platinum coin to invalidate the debt ceiling comes from a few key sentences tacked onto the 1997 Omnibus Consolidated Appropriations Act. "Notwithstanding any other provision of law," it reads, "the Secretary of the Treasury may mint and issue platinum coins in such quantity and of such variety as the Secretary determines to be appropriate."

---snip---

The platinum coin idea gained some powerful adherents during the debt-ceiling crisis of 2011, but it really developed traction following the 2012 fiscal cliff deal, as politicians and economics writers realized that the country would, indeed, be facing another debt-ceiling crisis in a matter of months. A Twitter campaign by Joe Weisenthal, of Business Insider, and Josh Barro, of Bloomberg View, forced it into the conversation, and subsequent endorsements by Rep. Jerry Nadler (D-NY), Nobel Prize-winning economist Paul Krugman and former U.S. Mint director Philip Diehl gave it further legitimacy.

But others, including myself, worried that the coin would be seen as an unprecedented power grab by the president, leading to a far more bitter standoff over the debt ceiling, a possible panic in the financial markets and a showdown in the courts. There was also the simple fact that it would, indeed, represent an admission that the government's executive and legislative branches could no longer be trusted to come together and effectively manage the country's finances.

Nevertheless, many top Democrats believed that the White House needed some kind of fallback option. Former president Bill Clinton said that if he were in office, he would invoke the 14th Amendment to call the debt ceiling unconstitutional "without hesitation, and force the courts to stop me."

On Friday, Senate Majority Leader Harry Reid and his leadership team sent President Obama a letter urging him to "to take any lawful steps to ensure that America does not break its promises and trigger a global crisis -- without congressional approval, if necessary."

In response, Senate Minority Leader Mitch McConnell released a statement saying that to avoid the debt ceiling, "Democrats are looking at everything from the ridiculous (printing a trillion-dollar coin) to outright abdication of Congressional responsibility. But avoiding this problem will only make it worse."

The White House seems to agree. This is, in fact, the second time that the Obama administration has ruled out a possible end run on the debt ceiling. In December, Press Secretary Jay Carney said, "This administration does not believe the 14th Amendment gives the president the power to ignore the debt ceiling -- period."

The administration's position is that raising the debt limit is Congress's responsibility until the day that Congress votes to make it the White House's responsibility, which is a resolution the Obama administration would happily accept. Until then, White House officials say, they will not negotiate over the debt ceiling, and if congressional Republicans attempt to use it as leverage, then the consequences will be theirs to bear.

Unless Obama plans on just letting the country default it looks like he is giving up. I have trouble believing he will not cave if the Republicans won't give in. I would personally prefer default to a cave in. What would be hurt the most is the financial sector. Perhaps he is relying on them to bring the Tea Party faction to heel.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

OK. Irish newspapers are even trying to charge for links to their material even though the actual link does not copy any copyright material, merely points to it. Talk about shooting yourself in the foot...

If Obama mints the coin, the Republicans can instantly switch (they're incredibly good at this) from threatening financial chaos to ferociously demagoguing the prevention of that chaos--in a way that the 99.9 percent of the American people who aren't constitutional lawyers or financial economists can easily understand.

We've already gotten a pretty good taste of their material: Like the National Republican Congressional Committee's brilliant argument that the weight of a $1 trillion coin would sink the Titanic.

I said brilliant and I meant it. As a monetary concept, the idea that a $1 trillion coin has to contain $1 trillion worth of precious metal may be so freaking stupid it makes Glenn Beck look like Milton Friedman. But, as a political talking point for the cable news viewing masses--the teabagger masses in particular--it's right on target: simple, intuitively obvious, and hard to refute without using words like "seignorage." It even comes with its own funny graphic.

Why should they? Tens of millions of dollars have been spent, at the academic and popular levels, to obscure and obfuscate what money is and how it works; something, when one gets down to it, really isn't all that hard to understand.

Money, mechanically, is easy to understand as a construct, but that is in our day a simple theoretical construct with little meaning.

Money, metaphysically and epistemologically speaking, is far more interesting, given the fetishism built up round money.

Look at the Germans, monetary animists...we are still in pre-socratic turn times when it comes to them, creators of the virtual gold standard (the one they fetishize from the early 20's when they found their miracle Mark...German economics of course being stuck in a pre-Hitler time warp...and don't even get me started on real gold bugs in the US and the UK...)

I get calls. The White House insists that it is absolutely, positively not going to cave or indeed even negotiate over the debt ceiling -- that it rejected the coin option as a gesture of strength, as a way to put the onus for avoiding default entirely on the GOP.

it was the Federal Reserve that killed the proposal, the official told BuzzFeed, denying a purely political rationale for the announcement, saying the independent central bank would not have credited the Treasury's accounts for the vast sum for depositing the coin.

If Obama follows the course described by Billmon I will be very happy - regardless of the consequences - even if he just lets it burn. The damage to the financial sector will be sufficient that hits (hyperbole alert) may be put out on all who had a hand in creating the Tea Party from the Koch brothers and Dick Armey to US Representatives - gladly funded by 0.01%ers. And, presuming they back down, the damage done to the batshit wing of the Republican party and the whole party itself will be serious. The Tea Party House Members will discredit themselves with their base.

I just have a hard time seeing Obama do this, given his previous history as POTUS. He has always found a way to turn a strong position into an outcome that only favors large political contributors, but, in this case, forcing the House to be responsible favors large political contributors and letting the Tea Party Caucus self immolate will be close to a US version of The Night Of The Long Knives, with the crucial difference that the guy the Brown Shirts supported is not in charge. If the Tea Party Caucus buries their swords point up and falls on them just let them bleed out. Don't be in a hurry to dial 911.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

One aspect of this that is not being discussed is what would happen if other nations around the world began doing this as well. What are the implications of that? What if every country in the world just began printing up coins and cash in any amounts? A related question is how would the rest of the world react to the US doing this? Would this encourage people (ie, investors) around the world to have more faith in the ability of the US government to manage the world's reserve currency or less faith? Would people conclude that this indicated that the US is seriously dealing with its economic and financial problems or that it is just attempting to paper over the problems?

All countries that use their own currency already prints the money the government needs. The difference here would be that the task to do so would be moved from the central bank to the treasury.

With trillion currency coins all that would happen compared to today's method is that:
a) banks would not get the subsidy they are used to
b) the national debt measurement would go away
c) the reference interest rate at longer maturities would drop to zero

And there would be some power reshuffling between different institutions within the states. Which is what we are seeing in the US today.

Can't see how it would affect the dollars status as reserve currency.

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Would people conclude that this indicated that the US is seriously dealing with its economic and financial problems or that it is just attempting to paper over the problems?

The US has no financial problems.

And since the debt ceiling is a prima facie bad-faith policy which is being used to obstruct any serious attempt to deal with America's economic problems, it is difficult to imagine that scrubbing it altogether would impact negatively on any reality-based forecasts.

Also, fuck what the "investors" think. "Investors" exist to serve the government's macroeconomic planning, not the other way around.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

In the case of the US, 'investors' are in serious need of some real serious taxes on their wealth, the results of which should be used, via sane fiscal policy, to get the economy out of the toilet and begin to put in place infrastructure that can allow the population to survive the rest of the 21st century. We can still make things much better than they will be if we continue the course we are following.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

And absent serious Tobin and other taxes on wealth, the next best thing is inflation and currency devaluation to reduce their wealth relative to the poor and middle class. Keeping the money supply high, and interest rates low are thus key par of any progressive strategy.

The difficulty is that the Fed is run by private banks for their own benefit. Hence, part of the beauty of the coin strategy was to remove the Fed's monopoly on money creation. If I am understanding MMT correctly, Governments shouldn't be borrowing at all - but creating money ex nihilo to fund thir programs. Those who don't like the long run inflationary implications of this can always approve taxes/interest rates to reduce the money supply in the economy more generally at times of growth

It makes no sense to me that the Government should be paying interest on its own money.

If I'd spent the past five years living in a monastery or something, I would take the Treasury Department's declaration that the coin option is out as a sign that there's some other plan ready to go. Maybe 14th Amendment, maybe moral obligation coupons or some other form of scrip, something.

...

The thing is, the coin option sounds silly, but it clearly obeys the letter of the law. As far as I can tell, none of the other options -- other than outright surrender -- has the same virtue. Failing to pay debt service would be a breach of contract. Paying contractors, and maybe Social Security recipients, in scrip would violate the law, which says that they should be paid -- not given IOUs. Deciding that the president has the right to ignore the debt limit after all would avoid these legal breaches at the expense of another breach.

...

As I said, if we didn't have some history here I might be confident that the administration knows what it's doing. But we do have that history, and you have to fear the worst.

Apparently fiscal and monetary cooperation is alive and well - the US Treasury and the Federal Reserve conspired to kill the platnium coin idea. In retrospect, we should have seen this coming. As the debate continued, it became increasingly evident that the platinum coin threatened the conventional wisdom in very deep and profound ways. It was a threat that could not be endured by Washington.

...

And then we come to the platinum coin, which threatened to expose the illusion that cash and debt are different at the zero bound. By extension, the platinum coin threatened to expose as folly any near-term deficit reduction plan. If you could issue a coin to support near term spending without inflationary consequences, what exactly is the rational for tighter policy now? There is none - but that would run directly contrary to the conventional wisdom among Very Serious People on both sides of the aisle that the debt needs to be addressed right now.

...

Ip argues that interest on reserves gives the Fed the power to control interest rates, and consequently the power to control inflation, regardless of the size of the balance sheet. If you follow Ip's analysis through to its logical conclusion, then why should the Treasury issue debt at all? Why not just issue platinum coins? Could cash and government debt combine to serve the same functions together that they serve separately? Consider the disruptiveness of that outcome to the status quo.

So, yeah, as Chait says, Stewart seems weirdly unaware that there's more to fiscal policy than balancing the budget. But in this case he also seems unaware that the president can't just decide unilaterally to spend 40 percent less; he's constitutionally obliged to spend what the law tells him to spend. True, he's also constitutionally prohibited from borrowing more if Congress says he can't -- which is a contradiction. But that's the whole point of the discussion.

...

Above all, however, what went wrong here is a lack of professionalism on the part of Stewart and his staff. Yes, it's a comedy show -- but the jokes are supposed to be (and usually are) knowing jokes, which are funny and powerful precisely because the Daily Show people have done their homework and understand the real issues better than the alleged leaders spouting nonsense. In this case, however, it's obvious that nobody at TDS spent even a few minutes researching the topic. It was just yuk-yuk-yuk they're talking about a trillion-dollar con hahaha.

Hey, if we want this kind of intellectual laziness, we can just tune in to Fox.